A 527 group is a non-profit group organized to raise money for political activities including voter mobilization efforts, issue advocacy, etc., which is tax-exempt under Section 527 of the Internal Revenue Code.
527 groups are political organizations that have no limits on how much they can spend in political campaigns and, most importantly, no limits on how much one can donate to them. Unlike candidates and PACs, which are limited in how much they can raise from one person, contributions to 527 groups are unlimited.
These organizations must report their contributions and expenditures to the Internal Revenue Service (IRS).
"Money donated to 527 groups -- the name comes from the section of the federal tax code under which the organizations operate -- must be disclosed under election law. Unlike contributions to candidates or major parties, there are no limits on what an individual can give."
This is considered to be a loophole in the 2002 McCain-Feingold campaign finance law, which sharply limited the ability for people to spend money to influence elections. Candidates themselves can always spend unlimited amounts of their own money, but contributions by others to candidacies are limited to a maximum of a few thousand dollars. 527 groups bypass that limit by raising huge sums from individuals.
The 527 groups cannot advocate election or defeat of a particular candidate, but can educate voters in a way that has close to the same effect. For example, an ad campaign by a 527 group criticized the war record of John Kerry without telling anyone precisely how to vote.
Spending by 527 groups has become enormous, dwarfing other types of spending in elections. In 2006, the spending by 527 groups was overwhelmingly on the side of Democratic candidates, and Democrats have thus opposed limiting them. All three Democrats on the FEC voted against regulating these groups, despite a court order requesting action.